At the beginning of 2010, there was chaos in Washington, D.C. President Barack Obama and the Democratic Congress wanted health care reform, and the fight to get it passed was slow and littered with references to confusing ideas that made the issue very difficult for the average American to understand.
Now that the dust has settled, many small business owners are left with one question: How does the new health care reform bill affect my business? The short answer is a lot. Let’s examine what is going into effect immediately and over the next four years.

Immediate Effects

Several parts of the new health care bill are already in effect. Most notably is a small business tax credit available now for businesses that provide health insurance. However, the amount of the tax credit provided varies depending on the size of the business. Businesses with 10 employees or less will receive a full tax credit if they pay their workers no more than an average of $25,000 annually and cover 50 percent or more of insurance costs. For businesses with 11 to 25 employees, the tax credit is reduced per employee. If the business pays its employees above $25,000 annually, the credit is reduced as the wage goes up. Businesses must also cover at least 50 percent of the cost of insurance to qualify, and businesses with more than 25 employees do not qualify for any credit.

Changes in 2011 Through 2013

The challenges with the new health care law will truly begin in 2011. First, businesses will be required to report employees’ health benefits on Internal Revenue Service (IRS) Form W-2. Second, employees with a health savings accounts (HSA) or flexible spending account (FSA) will be prohibited from using them to purchase non-prescribed items, including over-the-counter medication (except insulin). Additionally, there will be a 20 percent penalty tax for persons using their HSA for non-qualified purchases.

Employers may voluntarily participate in the CLASS Act long-term care program. This program was set up as federally subsidized insurance intended to protect someone who becomes disabled. Participating businesses’ employees will be automatically enrolled and subject to payroll deductions unless they choose to opt out. Businesses will have to meet minimum contribution requirements to receive protection from nondiscrimination requirements under cafeteria plans — which are tax-free benefits provided by an employer to employees.

Even more changes are in store for 2012 and 2013. Beginning in 2012, all businesses will have to issue an IRS Form 1099 not just to contract workers, but to any individual or corporation from which they buy more than $600 in goods or services in a tax year. Furthermore, in 2013, new limits will be placed on the deductibility of medical expenses for persons under 65 with the existing deduction being raised from 7.5 to 10 percent of adjusted gross income.

Also starting in 2013, high-income households will be paying more into Medicare. The Medicare payroll tax on wages and self-employment income in excess of $200,000 ($250,000 joint) will increase to 2.35 percent from 1.45 percent.
There will also be a 3.8 percent Medicare tax on investment incomes for high-income households. Finally, FSAs will be limited to a maximum contribution of $2,500 annually but will be adjusted for inflation.

Changes in 2014

Starting in 2014, health exchanges will be open to individuals and small businesses with up to 50 employees, while each state may opt to increase that number to 100. The federal government will also begin subsidizing health care for individuals between 100 percent and 400 percent of the federal poverty line who want to purchase their own health insurance through an exchange. These credits will not subsidize individuals with traditional employer-sponsored plans.

An individual mandate for purchasing health insurance also goes into effect. First, federal officials must define an essential benefits package with which all insurance policies must comply. Once that is defined, any individual who does not purchase health insurance must pay the greater of $95 or one percent of household income.

More importantly for small business owners, the bill contains a complex employer requirement to provide health insurance, pay penalties or both. Employers with more than 50 employees must provide health insurance or pay a fine of $2,000 per worker each year if any worker receives federal subsidies to purchase health insurance.

The penalties are based on the number of full-time or part-time employees counted as full-time equivalent employees, whether or not the firm offers coverage and/or one or more employees qualify for government subsidies toward the purchase of health insurance. Any business with more than 50 employees that does not offer health insurance coverage will be fined $2,000 per full-time employee per year if any full-time employee receives a premium tax credit from the federal government for use in a state exchange.

Moreover, an employer that has more than 50 employees, offers health benefits and has at least one full-time employee receiving a premium tax credit from the federal government will be fined either $3,000 for each employee receiving a credit or $2,000 for each full-time employee, whichever fine is smaller.

For employers with 50 or fewer employees, there is no penalty for declining to offer health insurance coverage. If an employee’s household income is below 400 percent of the federal poverty line and his or her insurance premium falls between 8 percent and 9.8 percent of household income, the employer must offer the employee a voucher equal to the amount the employer contributes toward an employee’s premium to purchase insurance in the exchange. An employee meeting these characteristics will not trigger the employer penalties.

It is important to note that part-time employees’ hours will be converted into full-time equivalents for purposes of these calculations. For example, if six employees each work five hours per week, it will count as if the firm had one additional full-time employee.

Impact of the New Law

Even more changes are on the horizon after 2014 and the law will not be fully implemented until 2018. The primary challenge for businesses is not only the cost of providing health insurance to their employees, but also the costs associated with meeting the new law’s requirements. Businesses need to consider the short- and long-term impacts of the new health care law to best prepare for their future.

Joe Paul is a NUCA Government Relations Intern.